Overview: Money Matters

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In discussing German hyperinflation, we wondered how such an event could happen. This group of readings presents arguments that the source of that disturbance was in the market for money balances, and that we should look for an excessive issue of money. We will look at the argument that inflation is a monetary phenomenon, that it is caused by "too much money chasing too few goods."

Few economists see the financial markets as the source of macroeconomic instability. In contrast, many economists believe that the market for money balances is an important source. These beliefs form the oldest thread of macroeconomic theory, dating back to the 16th century. This group of readings will explore what money is and why it is so important in macroeconomics. Key concepts you will meet are the equation of exchange, the quantity theory of money, and commodity money.

After you complete this unit, you should be able to:

  • Define money.
  • Describe the components of money in the United States.
  • Distinguish between a stock and a flow.
  • Explain why the store-of-wealth function of money is important.
  • Distinguish between income and transactions velocity.
  • When given any two of money, velocity, and spending, compute the third.
  • List the assumptions of the quantity theory of money.
  • Distinguish between the long run and the short run.
  • Explain how the quantity theory explained gold flows among nations.
Copyright Robert Schenk